Investments in random environments

Jesús Emeterio Navarro-Barrientos, Rubén Cantero-Álvarez, João F. Matias Rodrigues and Frank Schweitzer

Physica A: Statistical Mechanics and its Applications, 2008, vol. 387, issue 8, 2035-2046

Abstract: We present analytical investigations of a multiplicative stochastic process that models a simple investor dynamics in a random environment. The dynamics of the investor’s budget, x(t), depends on the stochasticity of the return on investment, r(t), for which different model assumptions are discussed. The fat-tail distribution of the budget is investigated and compared with theoretical predictions. We are mainly interested in the most probable value xmp of the budget that reaches a constant value over time. Based on an analytical investigation of the dynamics, we are able to predict xmpstat. We find a scaling law that relates the most probable value to the characteristic parameters describing the stochastic process. Our analytical results are confirmed by stochastic computer simulations that show a very good agreement with the predictions.

Keywords: Multiplicative stochastic processes; Scaling laws; Investment dynamics (search for similar items in EconPapers)
Date: 2008
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Citations: View citations in EconPapers (2)

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Working Paper: Investments in Random Environments (2008)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:phsmap:v:387:y:2008:i:8:p:2035-2046

DOI: 10.1016/j.physa.2007.11.029

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